Freddy Mac, Fannie Mae to be Seized

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The Treasury Department is putting the finishing touches on a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter. Such a move would essentially amount to a government takeover of the mortgage giants.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

It is also expected to involve the government injecting capital into Fannie and Freddie.That could happen gradually on a quarter-by-quarter basis, rather than in a single move, one person familiar with the matter said. In addition, the Treasury's plan includes a top-level management shake-up at both companies, according to people familiar with the plans. Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts. An announcement could come as early as this weekend. Some details are still being worked out.

Any move by the Treasury would be one of the most significant interventions by the government in the financial industry since the housing bust touched off turmoil in the credit markets a little more than a year ago. From the $168 billion economic-stimulus package in February through the bailout of investment bank Bear Stearns Cos., the Bush administration and the Federal Reserve have taken an aggressive stance in attempting to respond to what has become one of the worst financial crises in decades. Fannie and Freddie are vital cogs in the U.S. housing market. A Treasury intervention could help borrowers by keeping interest rates on mortgages lower than they would be in the event of continued instability.

Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.

Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages – almost half the nation's total.

Fannie Mae shares jumped 62 cents to $7.04 in regular trading but plunged 21 percent to $4.59 after hours on worries that a government rescue might wipe out equity holders. Freddie Mac shares rose 15 cents to $5.10 in regular trading but fell 18 percent to $4.18 after hours.

Walter

Sources: Federal Home Loan Bank Board, Federal Housing Finance Agency, The Wall Street Journal